As the war in Yemen moves into its fifth year, it is important to focus on the economic issues that have led to the civil war and continue to exacerbate the unfolding political and humanitarian crisis.
By Sarah Cole
The unification of North Yemen’s market and South Yemen’s command economies in 1994 highlighted the structural differences in the two regions. Yemen has also suffered from a lack of economic growth due to continued dependence on oil, remittances, and the growing of qat for GDP, as well as corruption and mismanagement within the government.
The 2015 civil war erupted partly because of the inadequate Yemeni economic infrastructure: the elimination of fuel subsidies and immediate rise in fuel prices served as a catalyst for Houthi protests. Throughout the war, the inability to access money or foreign currencies, the disruption of imports due to the Saudi naval blockade at Yemeni ports, and the physical destruction of the main drivers of the economy – including transportation, water, and agricultural infrastructure – have further deepened the economic crisis. The Hadi government – with help from Saudi Arabia – has also attempted to weaken the Houthis’ finances by moving the central bank to Aden. While foreign money and support has flowed from Saudi Arabia and the Gulf countries to the Hadi government and from Iran to the Houthis, humanitarian aid and the black market dominate the country’s economy.
In order to stabilize and recover from the conflict, Yemen will need to institute major changes in banking, trade, industry and agriculture. In the meantime, it is important to understand the history and structural challenges that characterize Yemen’s economy and need to be fixed in tandem with the stabilization of the country.
The pre-unification period
From its 1918 independence from the Ottoman Empire until a military coup in 1962, North Yemen was controlled by successive Imams. The army officers in charge of the coup created the Yemen Arab Republic, and an eight-year civil war followed between the republicans (supported by Egypt) and the royalists (supported by Saudi Arabia). The republicans triumphed politically in 1970 and converted the semi-feudal agrarian society into a market economy. Additionally, the proceeding reconciliation between the royalists and the republicans in 1970 allowed for a rapid increase in the emigration of working-age males from North Yemen to the oil fields of Saudi Arabia, at the height of the oil boom.
As North Yemen increasingly relied on remittances from family members, the shortage of working-age males in North Yemen created a country that became dependent on foreign aid – especially from Saudi Arabia and the USSR – in the context of an economic Cold War. At the peak of the emigration, in 1980, there were an estimated 800,000 North Yemenis abroad in Saudi Arabia and other Arab Gulf States. In addition, by the early 1980s, 40-50% of North Yemen’s GDP was based on remittances, according to the Historical Dictionary of Yemen.
South Yemen, on the other hand, went from a market economy under British colonial rule, with a bourgeoisie and merchant class centered in Aden, to a socialist command economy instituted via an anti-imperialist putsch in 1968. Revolutionaries nationalized land, housing, as well as most businesses, industries and banks. While South Yemen had oil fields, they were nowhere near as developed or prolific as the ones in Saudi Arabia. Oil exploration in South Yemen was sporadic and stayed in the eastern part of the country until the mid-’80s. Due to a lack of resources and an underdeveloped economy, remittances, along with foreign grants and loans (mostly from the USSR), composed the core of the South Yemeni economy before unification. Just like North Yemen, emigration from South Yemen to Saudi Arabia and the Arab Gulf produced a remittance economy. According to the Historical Dictionary of Yemen, there were about 200,000 South Yemenis working abroad in 1980. The flailing economy, combined with a civil war in 1986 that devastated much of the South’s political leadership, created a South Yemen that was amenable to unification by 1990.
From unification to the 2015 Civil War
The unification of the People’s Democratic Republic of Yemen (South Yemen) and the Yemen Arab Republic (North Yemen) into the Republic of Yemen in 1990 was supposed to solve the country’s economic problems. While the North had the stronger economy, the South had large potential oil reserves but was on the brink of collapse due to the waning power – and eventual dissolution – of its major economic and political supporter, the USSR. Ali Abdullah Saleh, from the North, was elected president, while Ali Salem al-Baidh, from the South, was appointed vice president. In addition, although Sana’a became the capital of the united country, Aden, the former capital and largest port of the South, remained the economic center of the new state.
The South and North struggled with different economic models and resources, while another economic hurdle appeared early after the unification. Saudi Arabia then expelled almost all Yemenis due to Yemen’s support for Iraq during the First Gulf War. This precipitated a crisis in unemployment and a sharp decrease in remittances. Additionally, Gulf countries decreased or even cancelled their foreign aid to Yemen, which accounted for almost $200 million per year at the time. Domestic unrest and several riots began in late 1991, and a deteriorating economic, political and social situation led to a civil war in 1994. After declaring a state of emergency in May 1994, President Saleh recaptured Aden from Southern secessionists in July of the same year and subsequently squashed the rebellion. He also consolidated his power, especially among the military, by prohibiting party membership within the armed forces.
Despite Yemen’s economic unification, the country continued to be the poorest in the Middle East. Immediately following the 1994 civil war, the Yemeni riyal was devalued, the cost of fuel doubled while food prices also rose, and there were water and electricity shortages. In the early 1980s, the riyal was valued at 4 riyals to 1 dollar. By 2010, the riyal had decreased to 200 to 1. While poverty declined between 1998 and 2005 from 40.3% of the population to 34.8%, the poverty rate had risen to 54.5% by 2012.
Food prices continued to go up in the 21st century, hitting a 60% increase after the 2008 food crisis. A major factor is that Yemen is a net food importer, and over 30% of arable land in the country is used to produce qat, a popular drug, instead of traditional agriculture. In addition to occupying valuable agricultural land, it also consumed one-third of Yemen’s water, adding to a natural water shortage that already placed Yemen five times below the water-poverty line before the 2014 civil war. As 90% of the country’s water was used for agriculture and 40-50% of water in piped systems was unaccounted for due to poor water management, water prices more than tripled in some cities from 2005 to 2010.
Corruption and mismanagement were also frequently mentioned: in 2005, for example, the World Bank cited corruption as the reason for the reduction of a loan package to Yemen, decreasing it from $420 to $280 million over three years. Yemen has consistently been ranked towards the bottom of the Corruption Perceptions Index score. It went from 88 on the list (out of 133 countries) in 2003 (the first year the index recorded Yemen), to 146 (out of 178 countries) in 2011, at the start of the Arab Spring, and further down to 161 (out of 174 countries) in 2014, at the start of the civil war. In addition, Al-Qaeda had been steadily staging attacks in and from Yemen since the suicide attack on the destroyer USS Cole in Aden, in October 2000, further disrupting societal stability and, by extension, the economy.
Yet, one of the biggest economic problems that Yemen faced was its lack of a non-oil economy. Prior to the 2014 civil war, Yemen relied on decreasing oil and gas reserves to fuel their economy, including a large natural gas liquefaction project that was launched in 2005. While approximately 25% of the GDP and 65% of government revenues came from oil and gas, there were regular budget shortfalls. A large source of these shortfalls were fuel subsidies: before decreasing them in July 2014, Yemen’s official news agency, SABA, issued a report stating that subsidies had already cost the government $3 billion, about 20% of state expenditures that year. In addition, the report said that the government had spent $22 billion on subsidies over the previous decade, causing a budget deficit of $5 billion, accounting for 13% of Yemen’s GDP.
In July 2014, Abdu Rabbu Mansour Hadi, the new Yemeni president, eliminated some fuel subsidies in exchange for a $570 million Extended Credit Facility provided by the IMF over a three-year period. Following this, fuel prices nearly doubled, and the Houthi movement – which had already been criticizing the United Nations’ transition process for attempting to split Yemen into a federation of six regions – immediately started protesting, with demands for lower fuel prices and a new government. Meanwhile, Hadi’s supporters and al-Islah, a party affiliated with the Muslim Brotherhood, held counter-rallies. Despite the fact that Hadi overturned the fuel price rise and sacked the cabinet in September 2014, after two weeks of protests, Houthis seized most of Sana’a and rejected a draft constitution from Hadi. In February 2015, Houthis appointed a presidential council to replace Hadi, and the civil war became official in March 2015 with the launch of Saudi-led air strikes and a naval blockade against the Houthis, enforced by a coalition of several Gulf states.
The 2015 Civil War
Since its start in 2015, the civil war has taken its toll on the social, economic, and political fabric of the country, plunging Yemen into a humanitarian crisis. Statistics are often unavailable, and reports from international organizations vary widely. For example, the United Nations Human Rights Office of the High Commissioner estimated that more than 6,500 citizens were killed and more than 10,700 were injured between March 2015 and August 2018. The Armed Conflict Location and Event Data Project (ACLED), however, estimated that 56,000 civilians and combatants had been killed between January 2016 and October 2018. In addition, two million Yemenis have been displaced by the conflict, while 22 million remain in need of assistance, eight million are at risk of famine, and over one million have been infected by cholera. Only 45% of Yemen’s health facilities are currently operational, contributing to the spread of the disease, further increased by the acute water crisis. More than 14 million people lack access to clean water and sanitation due to destruction of pumps and treatment facilities, as well as a shortage of fuel to power the water system.
Since Yemen imports nearly 90% of its food, the closure of the ports of Salif and Hodeidah (the latter recently reopened in December 2018 due to a ceasefire agreement) had devastating effects on food supply. The two ports handled around 80% of imports. As commercial imports decreased by 30% from May to August 2018, food prices increased and continue to place the biggest burden on the budgets of individual Yemenis. According to Mercy Corps, the price of most of the goods included in their humanitarian food basket such as flour, canned beans, sugar and vegetable oil, have increased by an average of 80% since the conflict began.
The World Peace Foundation indicates that, in August 2015, the Saudi coalition shifted from targeting military and governmental targets in and around Sana’a, to civilian and economic targets, including water, transportation, food, and medical infrastructure, as well as schools, cultural monuments and agricultural areas. This, in turn, heightened the food crisis, as farmers were unable to obtain the water needed for agriculture. This was a large contributing factor to the 50% decrease in the number of agricultural workers, itself worsened by the masses of internally displaced persons in rural areas. The military operation also destroyed the fishing industry, one of the largest food industries in the country. Indeed, the targeted campaign led to a 50% fall in fish catches and sales between the start of the war and December 2017, with the destruction of 220 fishing boats on the coast of the Red Sea.
Most of Yemen’s critical infrastructure has been destroyed or heavily damaged, while about one-quarter of Yemeni businesses have closed and 70% of laborers have subsequently been laid off. Within the first year of the war, from March 2015 to February 2016, Human Rights Watch reported airstrikes on 13 major factories that were businesses worth millions of dollars. According to the report, these factories were responsible for the production, storage and distribution of medicine, food and electricity, and ten of them had no military facilities within their vicinity (implying that the bombings were potentially war crimes). The Saudi coalition also helped the Hadi government to blockade Sana’a airport in August 2016 and move the central bank of Yemen to Aden in September 2016. This limited commercial and humanitarian shipments going into Houthi-held areas, and it gave control of the Yemeni riyal to the Hadi government, effectively cutting off pay to any government officials in the Sana’a area.
Because the government had been the largest employer in the country, the effects were devastating, cutting off salaries for jobs ranging from medical staff and military personnel to teachers and administrators, while halting pensions and social payments. The relocation of the central bank and the subsequent destruction of many of its supervisory and regulatory functions has created a large black market for currency exchange and international money transfers. This, in turn, created opportunities for money laundering, and other illegal financial operations. Despite the central bank’s move, public-sector workers, even in Hadi-controlled areas, are still missing paychecks. In January 2018, Saudi Arabia also promised to help the Hadi regime with an injection of $2 billion into the central bank. As of December 2018, however, the Deputy Governor of Aden, Shokeb Hobeishy, indicated that only $340 million had been authorized.
While this cash injection was hypothetically positive in that it allowed Yemenis to trade riyals for dollars, traders had to adjust, transferring their business activities from Sana’a to Aden, which caused difficulties for payments and transportation. Meanwhile, even with the port of Hodeidah momentarily reopened under the ceasefire, it was difficult to import food or other goods due to systemic challenges in the Yemeni financial system. Foreign exchange reserves are down to about $200 million, and £87 million (approximately $114.6 million) are frozen in an account at the Bank of England. Western banks have cut credit lines and refused letters of credit for traders working in Yemen. The resulting strained relations with Western banks have prevented Yemeni banks from transferring money abroad. These structural challenges have prevented trade despite the port’s reopening. For example, one major importer indicated that it was impossible to import wheat to the country since they were still waiting for a payment of $50 million in foreign currency, while another indicated they were owed $20 million. And even when products are provided in the market, there are few customers now who can buy them.
The conflict has cost Saudi Arabia an estimated $5-6 billion a month. In terms of weaponry, while the Saudi-led coalition and the part of the army that remains loyal to Hadi provide most of the military strength on the government side, the Houthis have gained economic support from Iran. The Saudi-led coalition is motivated by an ideological fear that any power given to the Houthis will embolden Iran to foment revolution within Saudi Arabia’s own Shi’a population. The war did not start out as an Iran-backed Houthi coup, but instead, as a confluence of socio-economic and political factors which then created the perfect environment for a Houthi rebellion. This is also proven by the partnership between the Houthis and former president Ali Abdullah Saleh, who shared the common goal of regaining power within the country. While Saudi Arabia immediately began supplying the government with economic and military assistance, Iran was involved far more as a political and moral support than a military partner.
Paradoxically, as the war continued, Iran increased its support to the Houthis and fulfilled the Saudi prophecy. Although it is hard to track Iranian activities in Yemen, there are indications that Tehran’s support to the Houthis went from limited military assistance in 2011 to more prominent aid in 2014. Since 2015, however, this support has significantly increased and focused on arms and military supplies, trainings and financial help. In addition, the UN Security Council has reported that Iran is shipping fuel illegally to the Houthis.
In any case, there is no doubt that Iran has contributed in various ways to the Houthi war effort, and their support has only increased over time. Financial aid is estimated to be between $10 and $20 million per year. Despite Iran’s assistance, however, much of the Houthis’ success has less to do with financing from Iran than their military tactics and weaponry. Indeed, a significant portion of their weapons were acquired from the Yemeni military through the Houthis’ alliance with Saleh and the army units loyal to him. Around 60% of Yemen’s military remained loyal to Saleh, including the Republican Guard, while a UN Panel of Experts on Yemen estimated that the military (loyal to Hadi) “potentially lost control of more than 68% of the national stockpile.” The Houthis have also retaliated against Saudi Arabia and UAE airstrikes. In 2017, they claimed to have targeted the Barakah nuclear power plant under construction in Abu Dhabi, as well as unsuccessful missile attacks launched into Saudi Arabia such as the one against King Khalid International Airport in Riyadh. They also damaged two Saudi oil tankers on the Red Sea. The following year, during the summer of 2018, Houthis claimed to have conducted drone strikes on economic targets within Saudi Arabia, including one targeting Saudi Aramco infrastructure.
In the end, the only beneficiaries of the conflict are arms manufacturers, whose products have been used to destroy the country. For example, the US presented Saudi Arabia with a $110 billion arms package in 2017, with Lockheed Martin leading as beneficiary with $29.1 billion in potential sales. In addition, thousands of weapons supplied by US and UK arms dealers have ended up in the hands of Saudi-supported groups in Yemen, including armored vehicles, rocket launchers, grenades and rifles that journalists allege violate Saudi and UAE end-use agreements with US and European countries. The humanitarian aid sector has also supplanted the state in terms of governance and social services. The World Bank estimated that, even if fighting were to cease, poverty rates would remain high for years.
At this point, until the war ends, the continuing destruction of vital economic resources and systems by both sides and the disunity and depletion of reserves within the central banking system will continue to place food items, water resources and medical supplies out of reach of the average Yemeni citizen. While the ceasefire at the Hodeida port has allowed humanitarian and medical aid to enter the country, Yemenis will continue to be dependent on international aid as long as the riyal continues to be devalued, wages are not being paid, and food as well as medical prices continue to increase. Until the war ends, allowing reliable physical infrastructure to be rebuilt, corruption and humanitarian aid will be the only replacements for a functioning market economy in Yemen.
Cover Picture: A bill of 500 Yemeni rials, © SharabSalam / Wikimedia Commons